You’ll often find one camp who believe
that houses make the best investments because they don’t like paying ground
rent or service charge on flats, perhaps they don’t like the lack of
control/dealing with the freeholder on what they perceive as costly maintenance
issues or the proximity of other tenants/noise in the building.
Some old school investors assume
(incorrectly) that you have to give flats back at the end of the lease so are
therefore a wasting asset, (in reality you can always force the freeholder to
extend the lease).
Then you will have another camp who
assume that Flats make better investments because they often have higher yields
(lower purchase price) and less maintenance to deal with as the freeholder
organises external works for them.
As you may know, I’ve had some
experience investing in both types of properties and although not meant to be
exhaustive, the list below reflects some observations of each type of
investment property.
Advantages of Flats as investments:
Below are some bullet points with the
advantages of buying a flat as an investment property.
Typically lower entry purchase price
than comparable houses
You can find good quality flats for two
thirds of the cost you would pay for a house
Traditionally higher cash on cash
returns and yields
Lifestyle trends may mean renting flats
become more popular thereby reducing voids as young people/people without
children often like them
Cost of maintaining the building is shared
& the freeholder (or the managing agent) will typically organise the work
Short leases, absent freeholder, can all
make the investment an attractive proposition if you work on wrestling the
freehold from the owner by getting others in the block to join with
you,enfranchise and buy the freehold.
Buying flats with management companies
that have gone bust can be cheap as they are often unmortgagble, fix the
problem and the value increases.
The cheaper nature of buying flats means
its easier to buy a large number to build up your portfolio.
You can spread your risk wider which
enables you to reduce the impact of one of your properties being untenanted.
Secure bigger discounts by buying in
bulk.
Strong demand in Tube areas can cause
prices to soar.
Easy to convert a flat to add an extra
bedroom if flat currently has a separate kitchen by moving kitchen into living
room.
Disadvantages of buying a flat as an
investment:
Below are some disadvantages of buying
flats as investments.
Some have High ground rent and service
charges
Harder to qualify for financing on a
certain type of flats and LTVs meaning lenders see flats as higher risk
Smaller living spaces
Less
opportunity/freedom to add value without consent of the freeholder (no ability
to extend, covert a loft, add a conservatory).
Lower unique factor when the flat is
situated in a large block.
Higher turnover of tenants.
Hidden high maintenance costs you didn’t
perceive or anticipate that could effect your investment returns as freeholders
can use this as a profit centre.
Harder to obtain finance on leases less
than 80 years
Value of the flat will drop quite a lot
once the lease goes below 70 years, so a payment will need to be made to the
freeholder to extend, say £15k-£25k on a £250k flat to take lease from 70 to
125 years
Ground rents can increase a lot over
time
”Share of the freehold” can give the
best or worst of both worlds depending how well others work together to
maintain the property.
High rise flats attract slower capital
growth, council high rise blocks are often nearly unmortageable.
Concentration risk of lots of flats in a
block can create a short term oversupply meaning voids or lower rental and
capital values.
May not be able to convert the property
into a HMO to reduce voids and increase cashflow.
Advantages of buying a house as a buy to
let:
Finance for single family units is more
readily available
More privacy and feeling of space for
tenants and buyers
They will attract longer term tenants
such as families with kids who won’t uproot after 6-12 months and are more
likely to maintain the property themselves
More potential for capital growth
They have a larger land size value
giving you flexibility to develop, convert or extend to add value to flip or
refinance
A house will always appeal to a larger
cross-section of buyers such as first time buyers, investors and young families
No high service charges or issues with
‘common areas’ not being maintained
Ability to buy the property at market
value, convert into multiple flats, create leases and either sell/remortgage or
a mixture of both
Disadvantages of buying a house as a buy
to let:
Typically higher investment and start up
costs
A Garden you may need to maintain
Higher stamp duty & interest costs
More wear and tear if families have
children
A house is more likely to be vandalised/boiler and pipes stolen if empty
Potential for more frequent maintenance
and repair bills as there’s more square footage to maintain
Because of the lower yield the cashflow
may be lower
As you can see there are clear
advantages and disadvantages with buying both as investment properties.
So what type of investment property is
right for you?
There is no ‘right answer’.
Investors who are stuck on this question
should instead be asking: “What property will deliver on my objectives and
return the highest return on my investment?”
What is clear is that regardless of your
decision, you’ll most likely find that both houses and flats will be a
wise decision if purchased with a high enough yield and at the right
price.
If you would like any advice on where you should
(or shouldn't) be buying your buy to let property, come and see me for a cuppa
and a chat. My advice will always be honest and hopefully will enable you to
make an informed decision of what is right for you.
benjamin.draper@martinco.com
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